Shares of Canadian pot producer Tilray (TLRY) have spiked on plans to merge with rival Canadian pot producer Aphria (APHA) and bigger legalization prospects in the U.S. There are also signs the stock could be getting a lift from the same Reddit community that encouraged the massive buying spree for stocks like GameStop (GME) and AMC Entertainment (AMC). So, is TLRY stock a buy right now?
Shares on Feb. 10 were up more than 10%, after soaring as much as 58% intraday, adding to a 41% jump a day earlier. The Reddit board WallStreetBets — credited with lifting GameStop a few dozen of other stocks in January and February — has set its sights on some marijuana stocks in recent days.
While it’s difficult to gauge what, exactly, is behind the surge for Tilray, a WallStreetBets post on Feb. 9 saying Tilray and Aphria had “much upside” had more than 11,000 upvotes. The TLRY ticker also had some mentions in WallStreetBets’ daily discussion thread.
The $3.9 billion merger deal between Tilray and Aphria would create a massive, multinational cannabis company, with business in Canada, the U.S. and Europe. The combined company would take the Tilray name and TLRY stock ticker.
But some analysts have questioned whether the deal is a good match. And Tilray, as it stands now, is trying to rein in losses and debt.
The merger between Tilray and Aphria is expected to close in the second quarter of 2021. Aphria CEO Irwin Simon will become CEO and chairman of the new company.
Under the deal, the new company will have offices in the U.S., Canada, Portugal and Germany. Its estimated recreational retail market share would be around 17% in Canada, with $685 million in yearly revenue. The merger will also bring together Manitoba Harvest, a hemp foods business Tilray owns, and craft brewer Sweetwater Brewing Co., which Aphria has agreed to buy.
Michael Lavery, an analyst at Piper Sandler who covers TLRY stock and other marijuana stocks, said in a research note that Tilray “stands out from competitors with its direct access to the EU, which we consider a key piece of Aphria’s interest in doing the merger.”
However, he noted, the combined company can’t enter the U.S. marijuana market — as it relates to THC products — until more federal reform passes. Even then, there are “costs and challenges to building brand awareness and adding infrastructure.”
Lavery added: “we do not believe its hemp food or alcohol distribution will be relevant for THC, so we do not expect a benefit from its existing infrastructure. We also do not expect imports from Canada to be permitted, so it would still need local production.”
TLRY Stock Fundamental Analysis: Profits Elusive
Tilray stock began trading in July 2018 on the Nasdaq via an IPO. That IPO was the first on a big U.S. exchange from a pure-play cannabis company. But the stock largely fell between then and September of last year, as industrywide concerns about profitability, sales growth and cash grew more severe.
Earnings growth is a staple of top stocks. But the EPS Rating of TLRY stock stands at a 21, with 99 being the best possible. Other marijuana stocks also have weak profit ratings. The EPS Rating is a gauge of a company’s profit growth.
In November, Tilray said it was “poised to deliver positive or break-even adjusted EBITDA in the fourth quarter of 2020.” EBITDA stands for earnings before interest, taxes, depreciation and amortization.
Third-quarter sales missed expectations. But the company’s loss was narrower than expected.
TLRY Stock And The Election, Coronavirus
Tilray has tried to boost sales via its Canadian recreational business, international medical business, and via Manitoba Harvest, which Tilray bought in 2019. Manitoba sells products like hemp granola and protein powders, as well as extracts with CBD.
In the U.S., Senate Majority Leader Charles Schumer along with Sens. Cory Booker and Ron Wyden said in February that they would make cannabis reform a priority this year.
The lawmakers made that announcement after the Democrats took control of the Senate and President Biden won the election. In November, five states also voted on Election Day to legalize medical or recreational cannabis.
Tilray CEO Brendan Kennedy said legalization in New Jersey, one of those states, could turn neighboring states like New York and Pennsylvania legal.
“Adult-use legalization in New Jersey is likely to have a domino effect on the states of New York, Pennsylvania, and Connecticut, as elected officials are worried that their residents will go to New Jersey to purchase product and thereby not generate tax dollars in their home state,” he said on the company’s third-quarter earnings call.
However, the company has remained cautious on selling CBD in the U.S. While the U.S. has legalized hemp, a source of CBD, crackdowns on retailers by authorities have made businesses reluctant to sell products containing the substance.
Tilray in November said it would “address the federal CBD market upon further clarity from the FDA.”
Key Market ‘May Remain Volatile’
The company has also made key moves in the European market. Tilray in January said the French government selected it to provide medical cannabis for tests on patients with ailments that have resisted traditional treatment.
In February, the company said it sent its first shipment of medical cannabis to Spain, and got the OK to offer medical cannabis in Portugal. Tilray in February also stuck an agreement to distribute medical marijuana in the UK.
Tilray is building a hub facility in Portugal to serve its international markets. But it warned that its business in the European Union, where more nations are legalizing medical cannabis, “may remain volatile” in the months ahead due to coronavirus-related restrictions in nations like Germany.
Kennedy, during the third-quarter earnings call, also said Tilray was “not aggressively fighting for market-share gains” in its cheap-weed business — something other producers have introduced to compete with the illegal market. He argued that the segment offered little profit potential.
Kennedy has said that the pandemic could speed the transition from the illegal market to the legal one, as people become more concerned about safety.
Tilray Technical Analysis, Other Marijuana Stocks
Powerful sales growth is a key metric when a company isn’t profitable. It can lead to profitable gains if the technical analysis of the stock proves positive.
The Composite Rating of TLRY stock stands at 86, according to Marketsmith chart analysis. That rating marks an improvement from previous months. But IBD research says investors should focus on stocks with Composite Ratings of 90 or higher.
Tilray’s relative strength line, and shares overall, are off lows reached in March. The line has sloped higher in February, hitting the highest levels in over a year. That trend indicates that TLRY stock has outperformed the S&P 500.
Innovative Industrial Properties (IIPR), a profitable cannabis-focused real estate investment trust, has a 91 Composite Rating. Its EPS Rating is 71.
TLRY stock in November began forming a cup base with a 12.25 buy point. Shares cleared that entry intraday on Jan. 7. But the stock is now well extended and hasn’t formed a new pattern.
The stock’s bounce off its 50-day/10-week lines on Jan. 4 represented a buying opportunity. But that opportunity quickly passed with a rally on Jan. 6, putting the stock out of range.
With the massive rise in February, Tilray is likely showing signs of topping. Tilray closed 70% above its 10-day line on Feb. 9. While anything is possible in a universe where retail investors increasingly organize to shoot stocks higher, stocks that are 40% above that line several weeks into a breakout are at high risk of a pullback.
Tilray stock is also 570% above its 200-day line and 300% above its 50-day line.
Is Tilray Stock A Buy?
Across the industry, marijuana stocks still face competition from the illicit market. Tilray’s profit metrics are still weak, and shares are no longer in buy range. While some investors, spurred by WallStreetBets and elsewhere, could reap massive gains, many could get burned if the stock’s fall happens as quickly as its rise.
Bottom line: TLRY stock is not a buy right now, despite the recent sector upswing. Shares are not in a buy zone and are showing signs of a climax run, IBD’s research shows.
IBD advises investors to focus on stocks with stronger fundamentals that are moving into buy zones.
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